India plans to eliminate the capital gains tax for foreign portfolio investors holding government securities, according to reports Thursday [1].
The move is designed to draw more stable foreign capital into the Indian debt market and provide support for the rupee [1, 3]. By lowering the tax burden on sovereign debt, the government seeks to diversify the sources of its funding and reduce reliance on volatile equity markets.
A source familiar with the matter said Thursday, "India plans to scrap capital gains tax on foreign portfolio investments in government securities, which could help boost such inflows" [1].
Beyond the removal of capital gains tax [1], the government is also considering the elimination of a 20% bond interest withholding tax on foreign investors [3]. This combined overhaul would make Indian government bonds more attractive to global institutional investors who are sensitive to tax leakage.
The policy shift comes as India faces a stark contrast between its equity and debt markets. Foreign investors have withdrawn nearly $28 billion from Indian equities so far this year [2]. In contrast, net foreign investment into Indian government bonds during the same period is approximately $1.4 billion [2].
Government officials are prioritizing the debt market because bond investments generally represent a longer-term commitment than equity trades. This stability is critical for maintaining currency levels and managing national debt costs. The proposed changes would align India more closely with other emerging markets that use tax incentives to attract global capital [3].
“India plans to scrap capital gains tax on foreign portfolio investments in government securities.”
This strategic pivot suggests the Indian government is prioritizing macroeconomic stability over immediate tax revenue. By incentivizing bond inflows, India aims to create a buffer against the volatility of the equity market, where massive outflows can trigger currency depreciation and financial instability.
